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Scope

have decision making rights over the asset during the period of use. This arrangement would be a
supply agreement, not a lease.

In Example 2-8 the arrangement is not a lease because Customer Corp does not have dispatch rights.
Therefore, it does not decide how and for what purpose the equipment is used during the period of
use. Determining whether a supplier or a customer has dispatch rights in a supply arrangement can be
challenging. The evaluation should be based on the specific facts and circumstances of the
arrangement. In making this assessment, companies should consider the following factors:

□ Can the product be inventoried and stored?

□ What is the typical lead time on orders?

□ How long is the interval between orders?

□ Does the customer provide sufficient notice for orders such that a supplier can decide when to
produce the required quantity or do customer orders dictate timing and level of the supplier’s
production?

EXAMPLE 2-9

Contract to purchase electricity on an on-demand basis

Customer Corp enters into contract to purchase energy from Supplier Corp; Supplier Corp owns a pre-
constructed natural gas-fired power generation facility. Customer Corp has contracted for power from
the asset on an as-needed basis to fulfill its power needs during peak periods of demand, but not on a
constant basis. Customer Corp will notify Supplier Corp when to generate power to satisfy its needs.
Customer Corp contracts for the right to all of the plants’ capacity (100% of the electricity that can be
generated) and therefore is entitled to all of the output. Customer Corp may allow the plant to sit idle
at times of low demand.

Supplier Corp is responsible for operating and maintaining the asset throughout the term of the
contract.

Which party has the right to control the use of the identified asset during the period of use?

Analysis

Customer Corp directs the use of the asset during the term of the contract through its right to dictate
when the asset should operate and produce energy; the economics are most significant when the plant
is operating and generating electricity. Since Customer Corp controls the decision to operate the asset
(even though Customer Corp does not physically operate the facility), it has the right to direct the use
of the asset that most significantly affects the economic benefits derived from its use, and therefore
Customer Corp controls the identified asset during the term of the contract. In contrast to Example 2-
8, Customer Corp is making decisions about the use of the asset during the period of use.

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